Autopilot Investing


One of my first memories on an airplane is the frightening sight of seeing the captain walking down the aisle talking to the passengers.  My question was obviously, “Who is flying the plane!?”  I was assured we were on autopilot and that everything was OK.  My life was in the hands of a machine and it was a bit unnerving.  Today, our world is filled with computer automation and it begs the question of whether “autopilot investing” makes any sense.

There is an active debate regarding the role of computers in a money manager’s decision making process.  Some argue that we should rely exclusively on machines while others insist that only a human can be trusted to make investment decisions.  There are advantages to each approach.

“Autopilot Investing”

  • System inputs are based on proven investment concepts.
  • The system can be tested and refined by looking at past data.
  • Human emotion is removed from the decision making process.

Discretionary Investing

  • The human brain is the most powerful computer on the planet.
  • Changing market conditions require the flexibility of a human mind.
  • Human intuition and live analysis can be very helpful in unique situations.

Here’s my take on the debate.  I go back to the airplane analogy.  The autopilot system is programmed based on sound aeronautical concepts and takes human emotion away from the mundane aspects of flying.  This translates well to designing an investment process and the guiding rules supporting it.  Computers can be used to gather market data for analysis, and for testing and fine tuning investment ideas to create strategies that have a statistical edge.  They can also be used to neutralize the emotion attached to the day to day noise of the market that can lead to unwise emotional decisions.  So I believe one must have a sound investment process backed by a tested statistical edge, logic, psychology and risk management. But that is not enough.  Here’s why.

The words you never want to hear from a pilot are, “prepare for an emergency landing.”  The only thing worse is when a flight attendant later adds in a shaky voice, “assume the crash position”.  I experienced this nightmare twenty years ago on a flight from Pittsburgh to Chicago.  The plane lost all hydraulic power which prevented the plane from slowing down and gliding in for a safe landing.  The brakes and steering were also not working which would cause other problems after hitting the runway at a high speed.  This was a unique situation that required the pilot to take control of the plane and take decisive action.  Autopilot wasn’t programmed for this situation.  I’m alive today due to the skill of the pilot and the rescue teams on the ground.

So, I also believe that there are times of crisis and opportunity when a money manager should take control of an automated system and use their judgment, experience and skill to implement the system’s rules with some discretion.

The takeaway from this is that the most prudent approach to money management is to use the human mind to devise, test and optimize a strategy that provides an edge, and then let the machine dictate the day to day decision making.  A portfolio manager can step in to provide some discretion in implementing the rules during rare extreme market environments in order to provide the benefits of human skill and experience.  That is the approach we take with AW Portfolios.


Gregg Indovina                                                                                                   VP of Investment Strategies                                                                               Accelerated Wealth